Time to Buy Baidu?

Robert Hsu, editor of China Strategy, says the leading Chinese Internet company is finally cheap enough to buy again.

The valuation of Chinese stocks is coming down to more reasonable levels. With high-quality China stocks now selling at lower P/E ratios, I believe it's time to add a new company to our portfolio.

I've had my eye on one company in particular for a long time now, but it's only been recently that I've seen it trade at a fair price. Baidu.com (NASDAQ: BIDU), the Google of China, used to be a stock that I avoided. After its splashy initial public offering a couple of years ago, I didn't think it was growing fast enough to justify its sky-high valuation. But Baidu has proven its dominance in China's Internet industry over the past couple of years, and I believe that we have a good opportunity right now to grab shares at a discounted price.

By December 2007, China's population of Internet users reached 210 million, which makes it the second largest Internet-using country in the world after the United States. And by year-end, it's estimated that China had 68 million broadband connections.

China's broadband growth will boost sales and profits for a wide range of companies, but I believe the best-positioned company will be Baidu.com.

The company's Chinese heritage is very important to its business model. From the start, Baidu has boasted that its knowledge of China and the Chinese language would give it a natural advantage over foreign search engines.

Baidu is the fourth-largest Web site in the world and the largest Web site outside of the United States. Often when Chinese people start using the Internet for the first time, the very first Web site they learn about is Baidu.

The company also monopolizes China's growing online advertising market. Baidu now accounts for 24% of China's [more than $500 million in] online ad sales. Google, Baidu's largest competitor, has only 9%. In addition, it controls 60% of China's paid search market, while number-two Google has only 26%.

Its strong user loyalty means that it will continue get the lion's share of traffic in China's Internet advertising market. Baidu is definitely the best bet for investors who are looking to play the exploding Chinese Internet sector.

Net income and sales for the fourth quarter and the full year skyrocketed. For 2007, net income soared 108% to $86.2 million or $2.48 per share, while sales more than doubled to $239.1 million. Baidu has issued a very bullish forecast for the first quarter of 2008: sales could almost double from a year earlier.

Baidu is exactly the kind of company that I look for—a fast-growing company in a fast-growing industry. It's currently in a great position to cash in on paid search advertising, the most rapidly growing segment of a quickly expanding online advertising market.

Buy BIDU under $300. (It closed above $242 Wednesday—Editor.) I expect shares to climb back to $400 by the end of this year.